Insurance prices still too high for pay-monthly customers

Six months after Which? revealed eye-watering interest rates being charged to insurance customers who pay monthly, new analysis reveals that little has changed. 

In August, we surveyed 49 car insurance firms and 48 home insurance firms to find out what they charge customers using 'premium finance' to pay for their insurance in monthly instalments.

On average, we found Annual Percentage Rates (APRs) still to be hovering at around 20%, but some firms are charging more than double this to some customers.

This follows a previous Which? survey in March, criticism of insurers from the Financial Conduct Authority (FCA) and subsequent promises from the industry to improve.

Here, we'll show you how providers compare, how many of them have changed their rates since we last looked, and how this can affect how much you'll pay for your insurance.

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Average rates around 20%

Among the providers that disclosed their APRs to us, the average for car insurers was 22%. For home insurers it was 20%. 

As in March, these rates are broadly comparable to those charged by credit card lenders, the majority of which offer rates below 25%. 

However, credit card lenders arguably face a much greater risk when providing credit, as they stand to lose any outstanding balance if customers default on payments. Meanwhile, if a policyholder stops paying for their insurance, the insurer can cancel their policy. This suggests that some insurance firms are charging excessively considering their reduced level of risk.

In our latest survey, Co-op Insurance charged the highest rate for both car and home insurance, with an APR of 29.89%.

• Find out more: car insurers rated by their fees and charges

Some providers weren't open about their rates

Our averages only reflect the providers that took part in our survey. A third of car insurance firms and a quarter of home insurers we approached either didn't respond or wouldn't tell us their APRs.

Two firms that did participate in the survey, and had comparatively high rates, felt some of the providers who'd kept quiet were distorting the picture. The AA commented that it was 'disappointed that some insurers, especially those with higher rates, decided not to participate in this survey. Their cooperation would've been beneficial so consumers could see all the options open to them.' 

Hastings Direct said its internal benchmarking highlighted a number of providers with APRs in excess of its own.

We found rates as high as 45%

To see why some firms were shy about disclosing their rates, we mystery shopped the car insurers that didn't participate in our survey. We found a number of them to be offering rates higher than those that took part.

We obtained quotes, posing as a 40-year-old Vauxhall Corsa driver living in south London. Broker iGo4 provided an eye-watering APR of 45.10%, which was the highest we came across. On its More policy, this meant paying £1,158.11 across the year rather than £996.65 upfront – a difference of £161.

Swinton offered our driver a rate of 33.8%, while Dial Direct, Nutshell and Zenith each charged rates of 29.90%.

A spokesperson for Markerstudy Distribution, speaking for each of these brands, told us: 'We understand the importance of offering premium finance to help customers purchase insurance products, particularly in today's market. We strive to provide good customer outcomes and regularly assess the rates of credit we offer customers.'

Some providers have dropped their rates

While our research has found some providers are still charging customers soaring rates of interest, there have been some improvements: eight car insurers and eight home insurers have dropped their rates since we last contacted them. 1st Central had the highest rate in March – charging drivers between 5% and 39.11% depending on their level of credit risk – but now charges monthly payers between 17% and 24.99%.

Co-op Insurance, meanwhile, told us in March that it planned to reduce its rates (which at the time ranged from 31.31%-34.75%), and it has followed through on its promise – even though its 29.89% rate tops our table. 

It told us that its rates of credit are set by Markerstudy Distribution (as were the worst offenders in our mystery shopping). It told us: 'Having reviewed the rates of credit set by our insurance partner Markerstudy Distribution, we have been able to reduce our rates for both car and home insurance over the past few months, and we are continuing to review this on an ongoing basis.

'We openly share our rates of credit with both consumers and consumer bodies as part of our commitment to transparency, and we are encouraging all providers within the industry to mirror this approach.'

Tesco Bank was the insurer to most drastically lower its rates. It dropped its car insurance APR from 27.30% to 21.40%, and its home insurance APR from 29.90% to 23.50%.

Hastings Group (behind the brands Hastings Direct, InsurePink and People's Choice) has meanwhile reduced its rates from 29.90% to 26.90%, and it claims it plans to make a further reduction to 24.80% in October. It told us: 'We are constantly reviewing how competitive our products are and how we can continue to reduce the overall cost of insurance for customers.'

Plans to make pricing fairer

Premium finance is essential for insurance customers who can't afford to stump up a year's premium all at once – especially with both car and home insurance premiums having risen markedly in recent years.

But the rates of interest paid by monthly customers have faced criticism for a while now. Which? has been sounding the alarm about how much extra monthly payers – likely to be the least financially resilient – were being charged, since the beginning of the year.

In the past several months, the industry has drawn criticism from both the FCA and MPs for the fairness of how premium finance works. In a Treasury Select Committee appearance in April, Charlotte Clark – director of regulation at the Association of British Insurers (ABI) – commented that it was difficult to say interest rates of around 40% 'feels reasonable'.    

The ABI has since announced a plan to assess and help to make premium finance fairer. It intends to publish a report next summer.

'The FCA must act against firms charging excessive rates'

Rocio Concha, Which? director of policy and advocacy, said: 'Many customers who pay for home or car insurance monthly don't do so out of choice, but financial necessity. That these same customers can end up paying over the odds compared to those who pay for cover annually is blatantly unfair.

'This is not the first time Which? has sounded the alarm over eye-watering levels of interest, yet excessively high rates persist.

'Car and home insurance policies aren't nice-to-haves, but essential for motorists and homeowners. It's high time for the FCA to take meaningful action against firms that continue to charge high rates and end this injustice.'

End the insurance rip-off

Which? wants the FCA to take urgent action against firms continuing to charge excessive rates of interest. We're calling for the regulator to urgently publish an action plan, and to collect data on the cost to firms of providing premium finance and the difference in their profit margins between customers paying monthly and those paying annually.

Premium finance is one area in which we think insurers are failing to deliver value to customers. 

At the time of writing, more than 70,000 people have signed our petition demanding action from industry and the regulator.

• Find out more: Learn about our campaign and sign our petition. 

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